Bonds Guide: How to Buy Bonds and When to Use Them

Stocks usually dominate investing conversations, but bonds deserve a place in almost every portfolio. Unlike stocks, which can fluctuate significantly from year to year, bonds offer a steady and predictable return. They are designed to smooth out the ride, reduce volatility, and give investors confidence to stay invested during market downturns.

For retirees, bonds can serve as a reliable source of income. For those still building wealth, bonds can prevent overreactions when the stock market turns ugly. Their role is less about growth and more about balance.

​Government of Canada bonds are considered the “risk-free benchmark” in Canadian finance. Every other investment is measured against them in terms of risk and return.

At its core, a bond is a loan. When you buy a bond, you are lending money to the issuer — typically a government or a corporation. In exchange, the issuer promises two things:

For example, if you buy a $5,000 Government of Canada bond with a 3% coupon and a 5-year maturity, you will receive $150 in interest each year for five years. At the end of year five, you get your $5,000 back.

The role of bonds changes as you move through your financial journey.

Bonds also play a natural role in the bucket strategy for retirement: they often fill the short-term bucket (one to five years of spending), while stocks handle the long-term growth bucket.

Buying a bond is simpler than many think, but the way you buy will impact how easily you can access your money later.

If you choose individual bonds, you typically purchase them through the “Fixed Income” or “Bonds” section of your brokerage account. You’ll select the issuer, the maturity date, and the coupon rate. Once purchased, the bond will pay interest until maturity, at which point you will receive your principal back. However, liquidity is limited: if you want to sell before maturity, you may have to accept a lower price.

By contrast, bond ETFs trade just like stocks. If you need to raise cash, you can sell them instantly on the exchange during market hours. This liquidity makes them very flexible, especially for DIY investors who may want to rebalance portfolios quickly or respond to market opportunities. The trade-off is that ETFs don’t mature; their price moves with interest rates and market demand, so you don’t have the certainty of getting your exact principal back on a set date.

If you prefer simplicity, a bond ETF can be purchased with a single click by entering its ticker (for example, ZAG.TO) and the number of units you want to buy.

Bonds are often marketed as “safe,” but that doesn’t mean they are risk-free.

Bonds vs. GICs
GICs guarantee your return and are insured, but your money is locked until maturity. Bonds offer flexibility, as they can be sold before maturity, although this may result in a loss.

Bonds vs. Dividend Stocks
Dividend stocks can outpace inflation and grow over time, but their prices swing with the market. Bonds offer predictability, but with limited upside.

Bonds vs. Cash or HISA ETFs
Cash provides safety and liquidity but little return. Bonds strike a middle ground by offering income.

Bonds vs. Bond ETFs
Individual bonds provide certainty (par value at maturity), while ETFs offer diversification, modest growth potential, liquidity, and no maturity date.

There’s no universal answer to the question of “how much should I hold in bonds?” The answer depends on your investment philosophy. Broadly speaking, there are two camps: the traditional safe model used by most of the financial industry, and the DIY aggressive model followed by many self-directed investors.

The safe model is based on the principle that risk should decline with age. Financial advisors often recommend the classic 60/40 portfolio (60% equities, 40% bonds) or the simple rule of thumb: “your age in bonds.” At 30, you might hold 30% bonds; at 60, that climbs to 60%. The goal here isn’t to maximize return — it’s to achieve peace of mind.

The advantage of this approach is emotional stability. Investors following this model are less likely to panic during downturns because the bond allocation softens the blow. The downside is that returns are muted. Over decades, bonds compound at a much lower rate than equities, which means you may reach retirement with a smaller nest egg.

On the other side, many DIY investors argue that bonds are unnecessary during the wealth-building years. They point to the historical performance gap between equities and bonds: over the long run, equities deliver far higher returns. In this model, . An emergency fund, on the other hand, provides stability for short-term needs, while the bulk of the portfolio remains invested in equities.

The trade-off is volatility. Portfolios heavy in equities can fall sharply in a downturn. DIY investors who follow this model must have the discipline to stay invested when markets fall, trusting that equities will recover and continue compounding over time.

To see how the mix of equities and bonds affects long-term wealth, consider a $100,000 portfolio invested for 20 years. Equities are assumed to grow at 10% annually, while bonds return 2% annually.

📊 Chart: Portfolio Growth Over 20 Years

Building wealth is only half the journey — spending it wisely in retirement is the other half. The greatest risk retirees face is not the average return, but rather the sequence of returns. If a market crash happens in the early years of retirement, while withdrawals are being made, the portfolio may never recover.

This is where bonds shine. They provide a buffer of stability, allowing retirees to withdraw from a safer pool of assets instead of selling stocks at a loss. Many retirees use a bond or GIC ladder to cover their living expenses for three to five years. This buys time for equities to recover after downturns and protects against running out of money too soon.

Let’s compare two retirees, both withdrawing $40,000 per year (4% of the initial portfolio):

10-Year Example (Scenario: -10% in Year 1, then alternating +8% / +10% Equities, +2% Bonds)

​In retirement, bonds aren’t about maximizing return. They are about buying time and stability. By acting as a shock absorber during downturns, they protect retirees from the devastating effects of poor early returns, ensuring that their money lasts as long as they do.

Tax Treatment
Unlike dividends (which benefit from the dividend tax credit) or capital gains (which are 50% taxable), interest income is fully taxed. That makes bonds most efficient inside registered accounts like RRSPs, RRIFs, TFSAs, or FHSAs. In taxable accounts, bonds can drag after-tax returns lower compared with dividend-paying equities.

Bond Laddering (Simplified)
A common retirement tool is a bond or GIC ladder: instead of putting everything into a single maturity, you spread your money across different terms — for example, 1-, 2-, 3-, 4-, and 5-year GICs. Each year, one matures, giving you liquidity while the rest keep earning. This reduces reinvestment risk and provides predictable cash flow.

Global Bonds and Currency Risk
Some bond ETFs include exposure to U.S. Treasuries or global bonds. While this can diversify across economies, it also introduces currency risk. Most Canadian investors stick to CAD-denominated bonds or currency-hedged ETFs to avoid exchange-rate fluctuations.

Bonds aren’t meant to make you rich; they’re intended to help you stay rich. They smooth the ride, reduce volatility, and keep you invested when the stock market tests your patience.

Whether you prefer the “safe” model or lean toward the more aggressive DIY approach, the right balance depends on how much risk you can stomach and how close you are to needing your money.

At the end of the day, stocks build wealth, bonds preserve it.